Agency downgrades $15bn Salomon debt

DAVID HELLIER

Standard and Poor's, the credit rating agency, yesterday said that it had lowered its rating for the long-term senior debt and preferred stock of Salomon Inc, the US investment bank and one of the biggest bond traders on Wall Street.

S&P said it had cut the long-term debt of Salomon from a rating of BBB+ to BBB and the preferred stock from BB+ to BB-. The agency said it had taken the move because of Salomon's continued poor earnings performance.

The decision affects about $15bn (pounds 9.5bn) of the bank's debt, although the agency said that it was maintaining its A2 rating on the bank's commercial paper. The bank had been placed on credit watch by the agency on 29 March, weeks before it announced second-quarter losses.

Salomon responded by saying that it was "extremely disappointed" by the decision, which it said was likely to have a "relatively small impact" on funding costs. Investors feared, however, that the rating downgrade could be a psychological blow for the bank.

S&P said: "While market volumes have improved, benefiting Salomon's client- related businesses in the second quarter, the earnings improvement was not sufficient to offset losses incurred by the firm's proprietary trading operation and by the Phibro division."

The agency said that the company's management faced challenges in retaining key personnel and in reinforcing its investment banking and trading franchises, while taking large stakes on to its own books continued to add significant volatility to results.

Salomon said that S&P's decision failed to recognise the bank's recent performance and moves taken by management to reduce risk levels.

The bank said it regarded the strong second-quarter performance of its client-related operations as a turning point that reflected improved volumes and the impact of management changes and strengthened risk management processes.

"We feel very strongly that Standard & Poor's action fails to adequately recognise the recent performance by the client-related business and the steps taken by management to reduce risk levels," Salomon said in a statement.